Question

if the actual budget deficit is $140 billion, the economy is operating $300 billion above its potential, and the marginal tax rate is 11 percent, what are the structural deficit or surplus and the cyclical deficit or surplus?

Answer 1

The structural deficit is $107 billion, considering the economy operates above its potential level and a marginal tax rate of 11%, while the cyclical surplus is $33 billion, which results from applying the tax rate to the economic performance above potential.

Step-by-step explanation:

The structural deficit refers to the part of the budget deficit that would exist even if the economy were operating at its potential level, and it's calculated independent of current economic fluctuations. To calculate the cyclical deficit or surplus, we take into account the effect of the economic cycle on the actual budget deficit. In this case, the economy's operation above its potential generates additional tax revenues due to higher income levels that are not part of the structural deficit.

The cyclical surplus can be calculated by applying the marginal tax rate to the economy's amount above potential. Here, the cyclical surplus equals 11% of the $300 billion above potential, which is $33 billion. The structural deficit is then the actual deficit minus the cyclical surplus, which equals $140 billion - $33 billion = $107 billion.In this example, the structural deficit is $107 billion, and the cyclical surplus is $33 billion.